- We maintain our BUY rating on CIMB Group Holdings Bhd (CIMB) with an unchanged fair value of RM8.20/share for FY14F. This is based on possible new merger scenario whereby RHB Cap may acquire CIMB in the potential mega bank merger between CIMB, RHB Cap and MBSB.

- CIMB’s annualised 2QFY14 net earnings fell short of our forecast by 8.6% and consensus estimates by 15.5%. Main area of shortfall is in the non-interest income line, although this is not a major disappointment as the company had earlier hinted that conversion of its investment banking pipeline remains soft.

- The investment banking division continued to be challenged by weak conversion of secured mandates. The treasury and markets division is relatively flat, due to low volatility. While third-party volume growth for the treasury division had remained firm, this was offset by thinner spreads given the low volatility in the rates market. Otherwise, the consumer segment remains healthy.

- Looking ahead, CIMB indicated that it continues to monitor Indonesia’s asset quality, which is now its main priority. The company hinted that NIM issue in Indonesia does not seem as trying compared to six months ago.However, asset quality issues may be more testing ahead given the likelihood of a more nationalistic approach by the government in terms of foreign ownership.

- As for the proposed merger with RHB Cap and MBSB, CIMB reiterated that the deal structure has to be value accretive for all three parties, with sufficient operational synergies and cost benefits. Having said that, CIMB also alluded that the large part of the synergies are likely to be cost driven, given that both RHB Cap and CIMB have mostly overlapping customer base. That said, CIMB believe that the deal structure will be value accretive for all parties.

- All in, CIMB’s 2Q results are pretty lacklustre. However, we view the 2Q earnings as providing a good indication for a base case earnings scenario, without any robust contribution from the investment bank and treasury divisions.

- To recap, in our earlier report dated 25 August 2014, our sensitivity indicates that if RHB Cap acquires CIMB, CIMB may potentially be worth RM8.20/share. We believe that the possible upside for CIMB from the new merger scenario is not yet fully reflected in CIMB’s current share price. The risk-reward trade off for CIMB still looks favourable. Thus, we reiterate our BUY rating on CIMB - a possible weakness in share price from the lacklustre 2Q results provides an excellent opportunity to buy.

Source: AmeSecurities